CULP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report. General Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. The company's three months ended August 2, 2026, and August 3, 2025, represent 13-week and 14-week periods, respectively. We refer to the three months ended August 2, 2026, as the "first quarter" and the three months ended August 3, 2025, as the "comparable quarter". Our operations are classified into two business segments: bedding and upholstery. On April 24, 2025, the company announced a strategic transformation of its operating model to combine certain activities within the bedding and upholstery segments and create one integrated Culp-branded business. This strategic transformation was completed by the end of fiscal 2026. Bedding The bedding segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have a bedding manufacturing operation located in Stokesdale, North Carolina, and a sewn mattress cover operation located in Ouanaminthe, Haiti. Upholstery The upholstery segment develops, sources, manufactures, and sells fabrics primarily to residential, commercial, and hospitality furniture manufacturers. Currently, we have upholstery operations located in Stokesdale, North Carolina, and Shanghai, China, as well as a wholly-owned subsidiary, Culp Fabrics Vietnam Company Ltd., which has an administrative office and showroom located in Ho Chi Minh City, Vietnam. Our Vietnam office enhances our strategic sourcing capabilities and further diversifies our supply chain in Asia, while our recently added showroom facilitates better product exposure with our growing customer base there. During fiscal 2026, as part of the strategic transformation noted above, we closed a leased upholstery facility located in Burlington, North Carolina, and transitioned its distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina. Our Stokesdale, North Carolina facility had historically been operated solely by our bedding segment. See Note 10 of the consolidated financial statements for further details regarding this restructuring activity. Additionally, the upholstery segment includes Read Window Products, LLC ("Read"), a wholly owned subsidiary that provides window treatments and sourcing of upholstery fabrics and other products, as well as related measuring and installation services, to customers in the hospitality and commercial markets. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. Read's operations were previously conducted at a leased facility in Knoxville, Tennessee, and also within a leased upholstery facility in Burlington, North Carolina, but these operations were moved to our Stokesdale, North Carolina facility in fiscal 2026 as part of the strategic transformation noted above. I- 31 Executive Summary Consolidated Results of Operations Three Months Ended (dollars in thousands) August 2, 2026 August 3, 2025 Change Net sales $ 53,973 $ 50,691 6.5% Gross profit 15,378 7,228 112.8% Gross profit margin 28.5 % 14.3 % 1420bp Selling, general, and administrative expenses 8,709 9,119 (4.5)% Restructuring credit — 3,508 (100.0)% Income from operations 6,669 1,617 312.4% Operating margin 12.4 % 3.2 % 920bp Income before income taxes 6,849 1,138 501.8% Income tax expense 868 1,369 (36.6)% Net income (loss) 5,981 (231 ) N.M. Net Sales Overall, our consolidated net sales for the first quarter of fiscal 2027 increased by 6.5% compared with the same period a year ago, with bedding sales increasing by 13.2%, and upholstery sales decreasing by (1.9)%. Net sales increased despite the first quarter comprising a 13-week selling period versus 14 weeks in the comparable quarter. This sales growth was achieved notwithstanding continued challenges in the home furnishings industry, including softness in consumer spending and housing-related activity affecting demand, as well as ongoing uncertainty associated with global trade and tariff conditions. The increase in sales was primarily attributable to the bedding segment, which reported sales growth of more than 13% compared to the prior-year period despite the continued low-demand market environment and having one fewer shipping week during the quarter. In the upholstery segment, sales were within range of the comparable quarter when considering the shorter selling period. In addition, we saw some indications during the quarter that demand in residential upholstery, which represents our largest upholstery end market, may be stabilizing. We continue to believe that demand in our core bedding and furniture markets should improve over the longer term and that our commercial strategies will support additional revenue growth, particularly if bedding industry replacement-cycle trends develop as anticipated. However, the timing and extent of any recovery remain dependent on a sustained improvement in housing activity and discretionary consumer spending. Despite the current macroeconomic environment, we have continued to expand our presence in select channels and believe customers increasingly recognize the benefits of our global manufacturing and sourcing platform, including substantial U.S. production capabilities. We believe these capabilities are particularly relevant as customers evaluate supply chain cost structures and reliability in light of ongoing trade and tariff developments. We also believe that our actions to restructure our bedding platform, integrate U.S. distribution operations, and consolidate our production footprint in China strengthen our operating foundation and, coupled with our expertise in product development and customer service, position the company to pursue additional market opportunities and grow as macroeconomic conditions and other factors affecting demand improve. See the Segment Analysis section below for further details. Gross Profit Our consolidated gross profit for the first quarter of fiscal 2027 was $15.4 million, an increase of $8.2 million, or 112.8%, compared with consolidated gross profit of $7.2 million for the first quarter of fiscal 2026, with bedding gross profit increasing by 190.4%, and upholstery gross profit increasing 59.4%. Consolidated profit margin increased by 1,420 basis points from 14.3% during the first quarter of fiscal 2026 to 28.5% during the first quarter of fiscal 2027. The increase in overall gross profitability for the quarter primarily reflects the recognition of recoveries of previously incurred tariff expenses under the International Emergency Economic Powers Act ("IEEPA"), which were recorded as a reduction to cost I- 32 of sales, as well as higher sales volumes and operational efficiencies resulting from the company's restructured and integrated operating platform. See the Segment Analysis section below for further details. Loss Before Income Taxes Overall, our consolidated income before income taxes for the first quarter of fiscal 2027 was $6.8 million, an increase of $5.7 million or 501.8%, compared with income before income taxes of $1.1 million for the same period a year ago. Operating performance for the quarter benefited from a one-time recovery of expenses previously incurred in connection with IEEPA tariffs and continued to benefit from lower costs and operational efficiencies resulting from the Company's restructured bedding manufacturing platform. Operating performance also continued to benefit from additional initiatives to reduce selling, general and administrative expenses, implement price increases to offset the impact of tariffs and higher petrochemical costs, and further integrate the upholstery business. Income Taxes We recorded income tax expense of $868,000, or 12.7% of income before income taxes, for the three-month period ended August 2, 2026, compared with income tax expense of $1.4 million, or 120.3% of income before income taxes, for the three-month period ended August 3, 2025. The primary factors that decreased the company's effective income tax rate for the three months ended August 2, 2026, compared with August 3, 2025, follows: • During the first quarter of fiscal 2027, we experienced pre-tax income from our U.S. operations that mostly related to tariff refunds totaling $6.9 million (see note 18 to the consolidated financial statements for further details). As a result, we partially reversed our full U.S. valuation allowance, which decreased the effective income tax rate by 12.9%. In comparison, during the first quarter of fiscal 2026, we experienced a pre-tax loss from our U.S. operations that mostly related to our recent restructuring activities (see note 10 to the consolidated financial statements for further details). Accordingly, a full U.S. allowance was applied against the fiscal 2026 loss carryforward, which led to an increase in the effective income tax rate of 60.4%. • During the first quarter of fiscal 2026, we recognized a gain from the closure and sale of our manufacturing facility located in Quebec, Canada, which increased the effective income tax rate by 15.9%. No such transactions occurred during the first quarter of fiscal 2027. • As of the end of the first quarter of fiscal 2027, we determined that our foreign operations were expected to meet the high tax exception test related to Net CFC Tested Income (NCTI) for the full year fiscal 2027, and therefore the company currently expects not to have a NCTI inclusion and incur income tax. Accordingly, there was no impact on the effective income tax rate for the first quarter of fiscal 2027. In comparison, as of the end of the first quarter of fiscal 2026, we determined that certain foreign jurisdictions were not expected to meet the high tax exception test related to NCTI for the full year fiscal 2026, and therefore, the company had a NCTI inclusion and incurred income taxes, which led to an increase in the effective income tax rate of 12.6%. • During the first quarter of fiscal 2027, we reported a higher consolidated pre-tax income totaling $6.8 million, compared with $1.1 million during the first quarter of fiscal 2026. Accordingly, the principal differences between our income tax expense at the U.S. Federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first quarter of fiscal 2026, compared with the first quarter of fiscal 2027. Refer to Note 15 of the consolidated financial statements for further details regarding our provision for income taxes. Liquidity As of August 2, 2026, our cash and cash equivalents (collectively, “cash”) totaled $10.2 million, which represents an increase of $1.9 million compared with cash of $8.3 million as of May 3, 2026. This increase was due mostly to net cash provided by operating activities of $8.1 million, partially offset by net payments on our lines of credit totaling $6.0 million. Our net cash provided by operating activities of $8.1 million improved during the first quarter of fiscal 2027, compared with net cash used in operating activities of $(695,000) during the first quarter of fiscal 2026. This trend mostly reflects: (i) cash proceeds totaling $6.9 million related to tariff refund claims, and (ii) a decrease in inventory purchases due to improved alignment with I- 33 current customer demand trends, partially offset by faster cash collections with key international upholstery customers during the first quarter of fiscal 2026, which did not occur during the first quarter of fiscal 2027. We had outstanding borrowings totaling $13.3 million under our line of credit agreements, of which the entire amount was reported in lines of credit-current within the August 2, 2026, Consolidated Balance Sheet. For further discussion, see “—Liquidity and Capital Resources,” below. Segment Analysis Our Chief Operating Decision Maker ("CODM") is our Chief Executive Officer ("CEO"), who regularly reviews the financial results of the company on a consolidated and segment basis for the purpose of evaluating financial and operating performance and allocation of resources to the individual segments noted above. Beginning in the first quarter of fiscal 2026, the CODM decided to use net sales and gross profit, excluding items that are not expected to occur on a regular basis (e.g. restructuring activities and tariff refunds), as the primary measure of segment profit or loss. Previously, segment performance was primarily evaluated based on net sales and income (loss) from operations before unallocated corporate expenses and other items that are not expected to occur on a regular basis (e.g., restructuring activities and tariff refunds). This change was made to align with internal management reporting and the decision-making processes affected by the strategic transformation of the company's operating model announced on April 24, 2025, which combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. The CODM evaluates segment performance based on: (i) net sales, (ii) cost of sales, (iii) gross profit excluding items that are not expected to occur on a regular basis (e.g., restructuring related charges and credits and tariff refunds), (iv) assets used in operations, which generally include accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale; and (v) capital spending. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Intangible assets are not included in segment assets, as these assets are not used by the CODM to evaluate the respective segment’s operating performance and allocate resources to the individual segments. Bedding Segment Three Months Ended (dollars in thousands) August 2, 2026 August 3, 2025 Change Net sales $ 31,750 $ 28,046 13.2% Gross profit 4,308 2,942 46.4% Gross profit margin 13.6 % 10.5 % 310bp Net Sales Bedding net sales increased 13.2% during the first quarter of fiscal 2027, compared with the same period a year ago. Our bedding business generated double-digit sales growth during the quarter despite operating within a shorter 13-week selling cycle compared to the 14-week selling period in the prior-year quarter and against the backdrop of continued softness in overall bedding industry demand. We believe this performance reflects ongoing progress in the implementation of our commercial strategies and continued momentum in targeted product categories, including sewn mattress covers and knitted fabrics. Our customers continue to recognize the benefits of the sourcing flexibility offered by our global manufacturing network and domestic production capabilities, particularly as supply chain economics, lead times, and continuity of supply remain areas of heightened focus in the current trade and tariff environment. Although we have observed signs that conditions across the bedding sector may be becoming more stable, the broader demand recovery anticipated by many industry participants as replacement activity normalizes has yet to emerge. Accordingly, we remain focused on strengthening relationships with key customers, expanding product placements, securing incremental business opportunities, and increasing market penetration in selected categories. Looking ahead, we believe that a more meaningful acceleration in bedding demand will depend in part on improvements in broader economic conditions, including factors that influence consumer confidence, housing-related activity, and discretionary spending. In addition, geopolitical uncertainties, including the ongoing conflicts in Ukraine and the Middle East, continue to present risks to I- 34 global economic activity and trade flows, which could adversely affect market demand, customer purchasing trends, supply chains, and future sales performance. Gross Profit Gross profit in the bedding segment (which does not include the impact of the tariff-related recoveries) was $4.3 million for the first quarter of fiscal 2027, an increase of $1.4 million or 46.4%, compared with gross profit of $2.9 million for the same period a year ago. The increase in gross profit from the comparable quarter was attributable primarily to revenue growth and lower manufacturing costs and productivity gains realized through the fiscal 2025 restructuring of the bedding segment. Gross profitability in the bedding segment also benefited from pricing initiatives and stronger margin performance. Segment assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale: (dollars in thousands) August 2, 2026 August 3, 2025 May 3, 2026 Accounts receivable $ 10,035 $ 10,216 $ 10,657 Inventory 26,727 35,102 31,757 Property, plant & equipment 19,039 22,061 19,755 Right of use assets — 50 — Assets held for sale — 40 — Total bedding segment assets $ 55,801 $ 67,469 $ 62,169 Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of August 2, 2026, accounts receivable of $10.0 million decreased by $(181,000), or (1.8)%, compared with accounts receivable totaling $10.2 million as of August 3, 2025. This trend stems from an increase in net sales of 13.2% during the first quarter of fiscal 2027, compared with the first quarter of fiscal 2026, that was more than offset by faster payment trends with key bedding customers that had shorter credit terms during the first quarter of fiscal 2027, as compared with the first quarter of fiscal 2026. Accordingly, days sales outstanding decreased to 29 days for the first quarter of fiscal 2027, from 36 days for the first quarter of fiscal 2026. As of August 2, 2026, accounts receivable totaling $10.0 million decreased by $(622,000), or (5.8)%, compared with accounts receivable totaling $10.7 million as of May 3, 2026. This decrease mostly represents continued faster payment trends with key customers during the first quarter of fiscal 2027, compared with the fourth quarter of fiscal 2026. Accordingly, days sales outstanding decreased to 29 days for the first quarter of fiscal 2027, from 32 days for the fourth quarter of fiscal 2026. Inventory As of August 2, 2026, inventory of $26.7 million has steadily decreased compared with inventory of $35.1 million and $31.8 million as of August 3, 2025, and May 3, 2026, respectively. This decrease in inventory is due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory. Inventory turns were 3.3 for the first quarter of fiscal 2027, as compared with 2.9 for the first quarter of fiscal 2026, and 3.3 for the fourth quarter of fiscal 2026. Property, Plant, & Equipment Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and bedding industries, as well as the restructuring initiative announced on April 24, 2025, that related to the strategic transformation of the company's operating model that combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. See note 10 of the consolidated financial statements for further details and description of our restructuring activities. I- 35 The $19.0 million as of August 2, 2026, represents property, plant, and equipment of $18.1 million and $855,000 located in the U.S. and Haiti, respectively. The $22.1 million as of August 3, 2025, represents property, plant, and equipment of $21.2 million and $888,000 located in the U.S. and Haiti, respectively. The $19.8 million as of May 3, 2026, represents property, plant, and equipment of $18.9 million, and $825,000 located in the U.S. and Haiti, respectively. Right of Use Assets As of August 2, 2026, and May 3, 2026, there were no right of use assets as a result of the completion of our restructuring activities during fiscal 2026. The $50,000 as of August 3, 2025, represents a right of use asset located in Haiti that was subsequently terminated during the second quarter of fiscal 2026. Assets Held for Sale As of August 2, 2026, and May 3, 2026, no assets were classified as held for sale as a result of the completion of our restructuring activities during fiscal 2026. The $40,000 as of August 3, 2025, represents assets held for sale located in the U.S. that related to the restructuring initiative announced on April 24, 2025. Refer to Note 8 of the consolidated financial statements for further details. Upholstery Segment Net Sales Three Months Ended (dollars in thousands) August 2, 2026 August 3, 2025 % Change Non-U.S. Produced $ 21,094 95 % $ 20,708 91 % 1.9 % U.S. Produced 1,129 5 % 1,937 9 % (41.7 )% Total $ 22,223 100 % $ 22,645 100 % (1.9 )% Upholstery net sales decreased 1.9% during the first quarter of fiscal 2027, compared with the same period a year ago. Net sales in our upholstery fabrics segment continued to be affected by challenging macroeconomic conditions, including subdued housing activity, weakened consumer confidence, reduced discretionary spending, and ongoing uncertainty related to trade policies and tariffs, particularly within the residential furniture market, which represents our largest upholstery end-use category. Despite these market headwinds, overall sales remained generally comparable period-over-period considering the shorter 13-week selling period in the current quarter compared to the 14-week selling period in the prior-year quarter. We also observed indications of improved demand consistency within portions of the residential upholstery market during the quarter. In addition, our hospitality and commercial upholstery businesses experienced favorable sales growth and benefited from improving market conditions in some areas. Looking ahead, we anticipate that conditions within the home furnishings industry will remain uncertain in the near term and may continue to be influenced by current macroeconomic trends. Nevertheless, as market conditions improve and a broader recovery in the furnishing sector develops, we believe our recently completed integration and optimization initiatives within the upholstery segment, together with our product development capabilities and supply chain optionality, will enhance our ability to support future revenue growth and capitalize on improving demand trends. The impact of ongoing geopolitical events, including the conflicts in Ukraine and the Middle East, remains difficult to predict and is subject to factors beyond our control. Consequently, we are unable to reasonably estimate the extent to which these developments may affect the upholstery fabrics segment. However, a further escalation of geopolitical instability, including potential disruptions to global shipping routes associated with conflicts in the Middle East, could adversely affect our operations, as well as those of our suppliers and customers. Such developments could also negatively impact global economic activity, supply chain efficiency, market demand, and our financial condition and operating results. I- 36 Gross Profit Three Months Ended (dollars in thousands) August 2, 2026 August 3, 2025 Change Gross profit $ 4,130 $ 4,286 (3.6)% Gross margin 18.6 % 18.9 % (30)bp Gross profit (which does not include the impact of the tariff-related recoveries) was $4.1 million for the first quarter of fiscal 2027, a decrease of (3.6)%, compared with gross profit of $4.3 million for the same period a year ago. Our upholstery segment was able to sustain relatively consistent operating margins despite continued weakness in the home furnishings industry and challenging conditions within the residential upholstery market. Market demand remained constrained by a combination of factors, including shifts in consumer spending behavior, uncertainty surrounding global trade policies and tariff actions, persistent inflationary pressures, reduced housing market activity, and other macroeconomic conditions affecting discretionary consumer purchases. Collectively, these factors continued to limit demand and impact profitability during the period. Looking ahead, we expect the subdued demand environment in our residential furniture markets to continue to pressure sales volumes and profitability within the upholstery segment until broader macroeconomic conditions improve. Nevertheless, we believe recent operational initiatives have strengthened the segment's long-term earnings profile. We recently completed the integration of our U.S. upholstery distribution and window treatment operations into our company-owned facility in North Carolina and further streamlined our upholstery operations in China. These actions are expected to improve operating efficiency, increase utilization of existing resources, reduce costs, and enhance the overall profitability of the upholstery segment. As industry demand recovers, we believe these initiatives position the segment to achieve greater operating leverage and improved financial performance. Management will continue to closely monitor market conditions and evaluate additional opportunities to optimize operations and align the segment's cost structure with prevailing demand levels. While maintaining a disciplined approach to expense management, we remain focused on preserving customer service levels, supporting key customer relationships, and maintaining the operational flexibility necessary to respond to changing market conditions and future growth opportunities. Segment Assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets: (dollars in thousands) August 2, 2026 August 3, 2025 May 3, 2026 Accounts receivable $ 10,240 $ 8,166 $ 9,712 Inventory 15,526 15,007 15,737 Property, plant & equipment 641 956 708 Right of use assets 312 2,159 496 Total upholstery segment assets $ 26,719 $ 26,288 $ 26,653 Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of August 2, 2026, accounts receivable of $10.2 million was higher than accounts receivable of $8.2 million and $9.7 million as of August 3, 2025, and May 3, 2026, respectively. The increase in accounts receivable reflects a higher sales mix with key international customers who had longer payment trends during the first quarter of fiscal 2027, compared with the first quarter and fourth quarters of fiscal 2026, respectively. Accordingly, days sales outstanding was 41 days for the first quarter of fiscal 2027, compared with 32 days and 33 days for the first quarter and fourth quarters of fiscal 2026, respectively. Inventory As of August 2, 2026, inventory of $15.5 million was consistent with inventory of $15.0 million and $15.7 million as of August 3, 2025, and May 3, 2026, respectively. This trend reflects consistent alignment of inventory purchases with current customer demand trends. I- 37 Inventory turns were 4.0 for the first quarter of fiscal 2027, compared with 4.8 for the first quarter of fiscal 2026, and 4.3 for the fourth quarter of fiscal 2026. Property, Plant, & Equipment Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and residential furniture industries, as well as from our recent restructuring activities announced on April 24, 2025. See note 10 of the consolidated financial statements for further details and description of our restructuring activities. The $641,000 as of August 2, 2026, represents property, plant, and equipment of $590,000, $30,000 and $21,000 located in the U.S., Vietnam, and China, respectively. The $956,000 as of August 3, 2025, represents property, plant, and equipment of $897,000 and $59,000 located in the U.S. and China, respectively. The $708,000 as of May 3, 2026, represents property, plant, and equipment of $642,000, $37,000, and $29,000 located in the U.S., Vietnam, and China, respectively. Right of Use Assets As of August 2, 2026, right of use assets of $312,000 decreased by $1.8 million, or 85.5%, compared with $2.2 million as of August 3, 2025. This decrease reflects the restructuring initiatives announced on April 24, 2025, which included the termination of lease agreements associated with upholstery facilities located in Burlington, North Carolina, and Knoxville, Tennessee, as well as one facility located in Shanghai, China. As of August 2, 2026, right of use assets of $312,000 decreased by $184,000, or 37.1%, compared with $496,000 as of May 3, 2026. This decrease mostly represents rent expense incurred over the terms of the existing respective lease agreements. The $312,000 as of August 2, 2026, represents right of use assets of $265,000 and $47,000 located in China and the U.S., respectively. The $2.2 million as of August 3, 2025, represents right of use assets of $1.4 million and $771,000 located in China and the U.S., respectively. The $496,000 as of May 3, 2026, represents right of use assets of $421,000 and $75,000 located in China and the U.S., respectively. Consolidated - Other Income Statement Categories Three Months Ended (dollars in thousands) August 2, 2026 August 3, 2025 % Change Selling, general, and administrative expenses $ 8,709 $ 9,119 (4.5 )% Restructuring credit — 3,508 (100.0 )% Interest expense 155 183 (15.3 )% Interest income 134 235 (43.0 )% Other income (expense) 201 (531 ) N.M Selling, General, and Administrative Expenses ("SG&A") The decrease in selling, general, and administrative expenses during the first quarter of fiscal 2027, compared with the first quarter of fiscal 2026, was primarily due to cost reduction initiatives in connection with our restructuring and integration activities announced on April 24, 2025, partially offset by incentive compensation. Restructuring Activities Restructuring Activities Announced May 1, 2024 On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to: (i) consolidate the company's North American bedding operations, including the closure and sale of the company's manufacturing facility and related land (the "Property") located in Quebec, Canada; (ii) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada, to the company's manufacturing facility located in Stokesdale, North Carolina; (iii) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long-standing supply partners; (iv) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location; as well as (v) reduce unallocated corporate and shared service expenses. I- 38 These restructuring activities were completed by the end of the second quarter of fiscal 2026, including the sale of the Property. Accordingly, we recorded a gain from the sale of the Property totaling $4.0 million that was classified within restructuring credit in the Consolidated Statement of Net Loss for the three-month period ended August 3, 2025. See notes 7 and 8 of the consolidated financial statements for further details regarding the Sales Agreement associated with the sale of the Property and determination of its fair value. Since inception of this restructuring initiative, we incurred cumulative restructuring and restructuring related charges totaling $5.3 million, most of which is related to the bedding segment. Of this total $5.3 million, $7.2 million represents a cash restructuring and restructuring related charge partially offset by a $(1.9) million non-cash restructuring credit. Restructuring Activities Announced April 24, 2025 On April 24, 2025 (fourth quarter of fiscal 2025), the company announced a strategic transformation of its operating model that combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. As part of this strategic transformation, we closed a leased facility located in Burlington, North Carolina, and a leased facility located in Knoxville, Tennessee, each operated by our upholstery segment, and transitioned their production and distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina, which had historically been operated solely by our bedding segment. These restructuring activities were completed by the end of the fourth quarter of fiscal 2026. Since inception of this restructuring initiative, we have incurred cumulative restructuring and restructuring related charges totaling $2.7 million, of which $1.4 million represents a cash restructuring and restructuring related charge and $1.3 million represents a non-cash restructuring charge. The following summarizes restructuring credit associated with the above announcements for the three-month period ended August 3, 2025: Three months ended (dollars in thousands) August 3, 2025 Additional depreciation expense for shortened useful lives $ 22 Employee termination benefits (4 ) Lease termination costs 62 Facility consolidation and relocation expenses 52 Net gain from the sale and impairment of property, plant, and equipment (3,747 ) Other associated costs 107 Restructuring credit (1) $ (3,508 ) (1) The total $3.5 million credit was classified within restructuring credit in the Consolidated Statement of Net Loss for the three-month period ended August 3, 2025, and mostly related to the bedding segment. Interest Expense The decrease in interest expense during the first quarter of fiscal 2027, compared with the first quarter of fiscal 2026, reflects a decrease in outstanding borrowings under our line of credit agreement associated with our U.S. operations. As of August 2, 2026, there were no outstanding borrowings under our line of credit agreement associated with our U.S. operations, compared with $7.0 million as of August 3, 2025, and May 3, 2026, respectively. Interest Income The decrease in interest income during the first quarter of fiscal 2027, compared with the first quarter of fiscal 2026, represents cash proceeds received on the entire remaining balance of our note receivable that occurred during the fourth quarter of fiscal 2026. This note receivable is associated with the sale of the Property. Refer to Notes 7 and 10 of the consolidated financial statements for further details regarding our note receivable and our restructuring activity announced on May 1, 2024. Other Income (Expense) During the first quarter of fiscal 2027 we reported other income of $201,000, compared with other expense of $(531,000) during the first quarter of fiscal 2026. This trend reflects insurance proceeds of $814,000 in connection with a resolution of a legal matter, I- 39 partially offset by less favorable foreign currency exchange rates experienced during the first quarter of fiscal 2027, resulting in a foreign currency exchange rate loss of $360,000, compared with a foreign currency exchange rate loss of $122,000 during the first quarter of fiscal 2026. Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China, Canada, and Vietnam. During first quarter of fiscal 2027, we incurred a foreign currency exchange rate loss of $250,000 that was associated with our operations located in China. This $250,000 stems from less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. The foreign exchange rate loss of $250,000 described above was mostly non-cash and was partially offset by an income tax benefit of $97,000. This income tax benefit of $97,000 was associated with deductible foreign exchange rate losses based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign exchange rate loss derived from our U.S. dollar denominated balance sheet accounts is considered tax deductible, as we incur income tax expense and pay income taxes in China’s local currency. Income Taxes Effective Income Tax Rate Our consolidated effective income tax rates for the three-month periods ended August 2, 2026, and August 3, 2025, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rates for the three-month periods ended August 2, 2026, and August 3, 2025, we were subject to loss limitation rules. These loss limitation rules require any pre-tax loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be impacted over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, Haiti, and Vietnam versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar. We recorded income tax expense of $868,000, or 12.7% of income before income taxes, for the three-month period ended August 2, 2026, compared with income tax expense of $1.4 million, or 120.3% of income before income taxes, for the three-month period ended August 3, 2025. The primary factors that decreased the company's effective income tax rate for the three months ended August 2, 2026, compared with August 3, 2025, follows: • During the first quarter of fiscal 2027, we experienced pre-tax income from our U.S. operations that mostly related to tariff refunds totaling $6.9 million (see note 18 to the consolidated financial statements for further details). As a result, we partially reversed our full U.S. valuation allowance, which decreased the effective income tax rate by 12.9%. In comparison, during the first quarter of fiscal 2026, we experienced a pre-tax loss from our U.S. operations that mostly related to our recent restructuring activities (see note 10 to the consolidated financial statements for further details). Accordingly, a full U.S. allowance was applied against the fiscal 2026 loss carryforward, which led to an increase in the effective income tax rate of 60.4%. • During the first quarter of fiscal 2026, we recognized a gain from the closure and sale of our manufacturing facility located in Quebec, Canada, which increased the effective income tax rate by 15.9%. No such transactions occurred during the first quarter of fiscal 2027. • As of the end of the first quarter of fiscal 2027, we determined that our foreign operations were expected to meet the high tax exception test related to Net CFC Tested Income (NCTI) for the full year fiscal 2027, and therefore the company currently expects not to have a NCTI inclusion and incur income tax. Accordingly, there was no impact on the effective income tax rate for the first quarter of fiscal 2027. In comparison, as of the end of the first quarter of fiscal 2026, we determined that certain foreign jurisdictions were not expected to meet the high tax exception test related to NCTI for the full year fiscal 2026, and therefore, the company had a NCTI inclusion and incurred income taxes, which led to an increase in the effective income tax rate of 12.6%. • During the first quarter of fiscal 2027, we reported a higher consolidated pre-tax income totaling $6.8 million, compared with $1.1 million during the first quarter of fiscal 2026. Accordingly, the principal differences between our income tax expense at the U.S. Federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first quarter of fiscal 2026, compared with the first quarter of fiscal 2027. I- 40 Liquidity and Capital Resources Liquidity Overall Currently, our sources of liquidity include cash, cash flow from operations, and amounts available under our lines of credit. As of August 2, 2026, we believe: (i) our cash of $10.2 million, (ii) improvement in cash flow from operations stemming from expected cash savings from our recent restructuring activities, and (iii) the current availability under our lines of credit totaling $19.2 million, including $17.7 million in available borrowings under the ABL Facility and additional availability under a credit agreement associated with our operations located in China (Refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements), will be sufficient to fund our foreseeable business needs, capital expenditures, commitments, contractual obligations, and income tax payments. As of August 2, 2026, our cash and cash equivalents (collectively, “cash”) totaled $10.2 million, which represents an increase of $1.9 million compared with cash of $8.3 million as of May 3, 2026. This increase was due mostly to net cash provided by operating activities of $8.1 million, partially offset by net payments on our lines of credit totaling $6.0 million. Our net cash provided by operating activities of $8.1 million improved during the first quarter of fiscal 2027, compared with net cash used in operating activities of $(695,000) during the first quarter of fiscal 2026. This trend mostly reflects: (i) cash proceeds totaling $6.9 million related to tariff refund claims, and (ii) a decrease in inventory purchases due to improved alignment with current customer demand trends, partially offset by faster cash collections with key international upholstery customers during the first quarter of fiscal 2026, which did not occur during the first quarter of fiscal 2027. We had outstanding borrowings totaling $13.3 million under our line of credit agreements, which the entire amount was reported in lines of credit-current within the August 2, 2026 Consolidated Balance Sheet. Our cash balance may be adversely affected by factors beyond our control, such as: (i) recent customer demand trends affecting net sales; (ii) increased tariffs or other changes in U.S. trade policy related to imported products; (iii) supply chain disruptions; (iv) rising interest rates and inflation; and (v) geopolitical events (including conflicts in Ukraine and the Middle East). These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices. By Geographic Area A summary of our cash by geographic area follows: August 2, August 3, May 3, (dollars in thousands) 2026 2025 2026 United States $ 1,638 $ 510 $ 1,049 China 6,956 9,229 4,153 Canada 1,589 1,316 3,000 Vietnam 36 17 26 Haiti 7 15 36 Cayman Islands 9 7 9 $ 10,235 $ 11,094 $ 8,273 Common Stock Repurchase Program In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be repurchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors. During the first quarters of fiscal 2027 and 2026, we did not repurchase any shares of our common stock. As of August 2, 2026, $3.2 million was available for additional repurchases of our common stock. Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the first quarter of fiscal 2028. Dividends I- 41 On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. We believed that preserving capital and managing our liquidity were in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we have not made any dividend payments since fiscal 2023. Tariff Reimbursements Beginning in early 2025, the U.S. government imposed tariffs under IEEPA. In February 2026, the U.S. Supreme Court invalidated certain tariffs imposed under IEEPA, and we filed a claim seeking reimbursement for approximately $6.9 million that we had paid under the invalidated tariffs. During the first quarter of fiscal 2027, we received payment for the full amount claimed of $6.9 million (excluding interest). See Note 18 of the consolidated financial statements for further details. Consolidated Basis - Working Capital Operating Working Capital Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $39.8 million as of August 2, 2026, compared with $43.7 million as of August 3, 2025, and $41.6 million as of May 3, 2026. Operating working capital turnover was 5.1 during the first quarter of fiscal 2027, compared with 5.4 during the first quarter of fiscal 2026, and 4.9 during the fourth quarter of fiscal 2026. Accounts Receivable Accounts receivable was $20.3 million as of August 2, 2026, an increase of $1.9 million, or 10.3%, compared with $18.4 million as of August 3, 2025. This increase stems from an increase in net sales of 6.5% during the first quarter of fiscal 2027, compared with the same period a year ago. Days sales outstanding was 34 and 35 days for the first quarters of fiscal 2027 and 2026, respectively. Accounts receivable was $20.3 million as of August 2, 2026, which was flat compared with $20.4 million as of May 3, 2026. This trend reflects a modest decrease in days sales outstanding of 34 days during the first quarter of fiscal 2027, compared with 35 days during the fourth quarter of fiscal 2026. Inventory As of August 2, 2026, inventory of $42.3 million has steadily decreased compared with inventory of $50.1 million and $47.5 million as of August 3, 2025, and May 3, 2026, respectively. This decrease in inventory is due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory related to our bedding segment. Inventory turns were 3.6 for the first quarter of fiscal 2027, compared with 3.5 for the first quarter of fiscal 2026, and 3.7 for the fourth quarter of fiscal 2026. Accounts Payable - Trade As of August 2, 2026, accounts payable - trade of $22.5 million has steadily decreased compared with accounts payable trade of $24.3 million and $25.7 million as of August 3, 2025, and May 3, 2026, respectively. This decrease in accounts payable - trade was due to a decrease in inventory purchases that stems from alignment with current customer demand trends, as well as the completion of our restructuring activities at the end of fiscal 2026. Financing Arrangements Currently, we have line of credit agreements with banks for our U.S. parent company and our operations located in China. We had outstanding borrowings associated with our line of credit agreements totaling $13.3 million, the entire amount of which was reported in lines of credit-current within the August 2, 2026, Consolidated Balance Sheet. As of August 2, 2026, we were in compliance with the financial covenants related to all our credit agreements. Refer to Note 11 of the consolidated financial statements for further disclosure regarding our line of credit agreements. Leases Refer to Note 17 of the consolidated financial statements for further disclosures regarding our lease obligations, which include a five-year maturity schedule. I- 42 Capital Expenditures and Depreciation Overall Capital expenditures on a cash basis for the first quarter of fiscal 2027 totaled $314,000, compared with $179,000 for the first quarter of fiscal 2026. Our low level of capital expenditures reflects the current unfavorable macro-economic conditions within the home furnishings and bedding industries. During the first quarter of fiscal 2027, we reported depreciation expense of $911,000, compared with $1.1 million for the same period a year ago, which mostly related to our bedding segment for both periods. We reported accelerated depreciation of $22,000 that was classified within restructuring credit in the Consolidated Statement of Net loss for the three-month period ended August 3, 2025. This accelerated depreciation expense pertained to the shortening of useful lives of equipment related to the consolidation of distribution activities from our Burlington, North Carolina facility to our manufacturing and distribution center located in Stokesdale, North Carolina. Due to the completion of our restructuring activities by the end of fiscal 2026, no accelerated depreciation was recorded during the first quarter of fiscal 2027. See Note 10 of the consolidated financial statements for further details and descriptions of our restructuring activities announced on May 1, 2024, and April 24, 2025. Based on current expectations, capital spending will center on capital projects that will increase efficiencies, improve the quality of our products, and facilitate future growth. Funding for capital expenditures is expected to be from cash provided by operating activities. Critical Accounting Policies and Recent Accounting Developments As of August 2, 2026, there were no changes in our significant accounting policies or the application of those policies from those reported in our Annual Report on Form 10-K for the year ended May 3, 2026. Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended May 3, 2026. Contractual Obligations There were no significant or new contractual obligations since those reported in our Annual Report on Form 10-K for the year ended May 3, 2026. Inflation A meaningful rise in raw material, utility, energy or other costs, as well as broader economic inflation, could materially and adversely affect our operating results. Competitive market dynamics have traditionally constrained our ability to fully offset such cost increases through price adjustments to customers. In fiscal 2023 and 2024, raw material prices declined, primarily due to lower oil prices and softening global demand. However, both years were marked by persistent challenges associated with elevated labor costs and limited labor availability. While raw material and labor costs stabilized through fiscal 2024 and the first half of fiscal 2025, recent developments such as global trade negotiations and the implementation of new tariffs and import restrictions beginning in the fourth quarter of fiscal 2025 have influenced industry pricing structures and supply chain patterns. These evolving conditions have placed upward pressure on our raw material costs, and this trend is expected to continue. In addition, energy prices have demonstrated substantial volatility in recent fiscal years and continue to represent an unpredictable element of our cost structure. In recent periods we implemented price increases designed to mitigate the impacts of rising petrochemical costs and recent tariff actions affecting products imported into the U.S., including those imported from China, as well as additional surcharges in response to tariffs on imports from Haiti, Turkey and elsewhere. The majority of these tariff-related price increases began to phase in and become effective as of the second quarter of fiscal 2026, and we believe that our current pricing strategies position us to effectively absorb the additional costs flowing from applicable tariffs, but the above-referenced dynamics may ultimately lead to higher input costs, with potential adverse implications for our financial performance. Further, persistent inflationary pressures significantly curtailed consumer spending during fiscal 2023, with effects extending into fiscal 2024, 2025, and 2026. This economic environment contributed to a broader slowdown in both the mattress and residential home furnishings markets, leading to lower demand from home furnishings manufacturers for our mattress fabrics and residential upholstery fabrics across this period. The duration and future impact of these trends remain uncertain, and it is difficult to predict I- 43 how inflationary conditions may continue to influence consumer behavior and the broader economic cycle for home furnishings products over the near and long term. I- 44 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK Interest Rates We are exposed to market risk from changes in interest rates regarding our credit agreements. Revolving Credit Agreement - United States Our U.S. revolving credit agreement ("Credit Agreement") with Wells Fargo Bank, N.A., permits both base rate borrowings and borrowings that require interest to be charged at a variable rate calculated using an applicable margin over SOFR (the secured overnight financing rate administered by the Federal Reserve Bank of New York (or its successor)), as defined in the Credit Agreement. The annual interest rate under the Credit Agreement as of August 2, 2026, was 5.65%. As of August 2, 2026, there were no outstanding borrowings under the Credit Agreement. Credit Agreements - China Operations Effective November 7, 2025, we entered into an unsecured credit agreement with the Bank of China ("BOC") that provides for a 10.0 million RMB ($1.5 million USD as of August 2, 2026) working capital loan, which agreement is set to expire on November 11, 2026. Interest is based on a fixed rate of 2.5%, and therefore borrowings under this agreement are not subject to future changes in the market rate of interest. As of August 2, 2026, the outstanding balance under this working capital loan was 10.0 million RMB ($1.5 million USD). During the first quarter of fiscal 2027, we entered into unsecured loan agreements totaling 21.0 million RMB ($3.1 million USD as of August 2, 2026), which agreements expire on dates ranging from May 20, 2027, through May 25, 2027. Interest charged under these agreements is based on a fixed interest rate of 2.3%, and therefore borrowings under this agreement are not subject to future changes in the market rate of interest. As of August 2, 2026, the outstanding balance under this agreement was 21.0 million RMB ($3.1 million USD). Effective March 3, 2026, we entered into an unsecured loan agreement totaling 29.0 million RMB ($4.3 million USD as of August 2, 2026), which agreement is set to expire on March 1, 2027. Interest charged under this agreement is based on a applicable interest rate of 2.4%, and therefore borrowings under this agreement are not subject to future changes in the market rate of interest. As of August 2, 2026, the outstanding balance under this agreement was 29.0 million RMB ($4.3 million USD). Effective March 17, 2026, we entered into an unsecured credit agreement with the China Construction Bank of China ("CCB") that includes 20.0 million RMB ($3.0 million USD as of August 2, 2026) that can be used in the form of a working capital loan and supplier financing agreements, and is set to expire on March 16, 2027. Interest is based on a fixed rate of 2.3%, and therefore borrowings under this agreement are not subject to future changes in the market rate of interest. As of August 2, 2026, the outstanding balance under this agreement was 10.0 million RMB ($1.5 million USD). Currently, we have supplier financing arrangements that bear interest at a fixed rate, which were paid in full at the time of borrowings, and therefore borrowings under these arrangements are not subject to future changes in the market rate of interest. Foreign Currency We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada, China, and Vietnam. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada, China, and Vietnam. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the U.S. dollar as their functional currency and a substantial portion of the company’s imports purchased outside the U.S. are denominated in U.S. dollars. A 10% change in the above exchange rates as of August 2, 2026 would not have materially affected our results of operations or financial position.